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Penny Stocks – Turn Your Pennies Into pounds
We’ve all heard about the investor how bragged about his 100% or 1000% return on a stock or about the guy who made it rich by investing in small caps, undiscovered stocks that made it big. In theory, it seems to be too easy. Invest in a couple of penny stocks, then sell them when they move up. Unfortunately, it is too easy. Too easy to lose money unless you know what to look for.
First, lets have a look at what types of companies trade on the OTC BB or Pink Sheets.
Stocks that no longer trade over 1 on the Nasdaq
These include companies that fell from grace (Enron). While it is possible that they may see better days in the future, the odds are stacked against them. Its usually best to avoid trading these stocks. If you feel that the temptation is too much, wait until the stock begins to rebound. If you try catching a falling knife, you will get hurt.
New Start Ups
Every year there are hundreds if not thousands of companies who decided to go public. Whether they need the money to expand their business, or are looking to cash out their equity, its a natural progression for a company with a compelling story, and a great track record to go public. While many of these companies will file for an IPO, many others will start off trading on the OTC BB as a penny stock
Second, lets look at some tips to help the penny stock trader avoid making costly mistakes.
Due Diligence
Stocks listed on the Pink Sheets don’t have to file annual or quarterly statements. This makes starting your due diligence difficult. Often, the information is sketchy at best, and typically, its biased. You should expect a shareholder to say good things about the company. If the company didn’t have potential, they wouldn’t be holding it. Or, they might be hoping to unload their shares and hope to talk you into buying.
Stocks listed on the OTC BB file annual and quarterly statements. This provides some measure of financial success. You’ll find most penny stocks lose money, whether through managerial incompetence, or research and development. The key is to identify the companies whose management has a record of consistently making money, or at the very least, delivering on their business plan, and decreasing expenses.
Penny Stock Newsletters
Being a writer for The Leading Source (http:www.1source4stocks.com) puts me in a biased position when speaking to penny stock newsletters. Here’s what I can tell you: be careful! Check the disclaimer for the amount the newsletter is being paid to carry the profile. Are they being paid in cash or in shares? You’ll likely find a corelation between the number of shares they are being paid, and the rating on the hype meter. Does that mean that you should avoid any stock where the company is paying IR professionals in shares? No. Just keep in mind that they are selling a story, and if they sell the story to other shareholders, they will gain. This is not a problem if you get in early, but could be a problem if you aren’t able to jump in right away.
Take a look at the track record of the newsletter. Have they profiled winners? Do they state the facts, or state the hype? Do they also offer unpaid stock profiles? If they do, you’ll likely find that they do their own research in all companies, and are looking to ensure that they aren’t passing a weak stock your way just to pay the bills.
If a company is paying an IR professional money to profile a stock to its subscribers, should you avoid it? Of course not. Think of the payment as advertising. They are promoting the company, and trying to get exposure. Like any company, the only way to get exposure is through some method of advertising. So dont dismiss a paid profile as hype. Keep it in the back of your mind while you are reading the profile, but pay attention to the profile. You may find a diamond in the rough that no one has discovered.
Volume
If you want to make money, you have to be able to buy and sell enough shares to lock in your profit, or protect your capital. If ABC company’s daily volume is only 500 shares a day, it may take you several days to accumulate a position worth taking. If there is bad news, who is going to buy your shares? If the volume is low, stay away. Its not worth it. If you feel that strongly about owning the company, consider contacting the company directly and working out a deal.
Buy Results, Not the Story
If you buy the hype, odds are, you will end up being the last one to own the shares, while everyone else has sold off their position. Look at a company, take a look at what their business plan was, and confirm if they have followed through on that plan. Were they successful? Did they bring a product to market on time? Did the company follow through on its acquisition strategy in the manner they set out? The hype might get you a quick pop, however, unless you are watching your trading screen every second of the trading day, you will miss out.
Size matters
There are thousands upon thousands of penny stocks. The size of your position should not be anymore than 2000 – 3000. While this may not seem like much, keep in mind that its not unusual for a 0.10 company to drop to 0.05. That’s a 50% loss. If your position is 10 000, a 50% haircut leaves you with only 5000. Keep your losses to a minimum. If the company has done well, and you are up, either take your profits off the table, or add to your position, and be sure to reset your stop loss so as to protect your previous profits. Capital preservation is the key to successful trading.
Have a plan before you buy. What are your reasons for buying. What is your exit strategy? Where is your stop loss? At what point will you take your profit? Write down these answers before you place that buy order.
Penny stock investing can be profitable. Remember, you are taking larger risks than you would if you were purchasing shares in a bank stock. That risk can be rewarded with returns that you cant get with a bank stock, or, it will be met with a large loss and a bad taste in your mouth for investing in penny stocks.
Do your homework, don’t believe the hype, and protect your capital.
Note: The Leading Source provides its subscribers with both paid and unpaid profiles. Follow those tips and you will watch your pennies grow into pounds.
Investing in the stock market sometimes boils down to one essential element, namely good choices. No matter how well we do our research, how often we buy and sell, or how much we pay experts for their tips and advice, without choosing stocks that represent value, we wont succeed. Although some are good at predicting the direction of the market and timing the ups and downs, if they dont purchase the right stocks, they will still meet with difficulties when trying to reap profits.
For that reason, some of the best paid people on Wall Street known primarily for their talent at picking stocks. Financial advisors give talks and write books and newsletters about how to choose stocks that will outperform the market, and most experts echo the same sentiment and agree that one of the best ways to judge a stock is from the point of view of a consumer. By using instincts we have already honed as ordinary shoppers, we can often ferret out information that even the most skilled and software-savvy market watchers miss. While they study analytical charts, earnings reports, and the stock exchange ticker tape, folks just like yourself actually do business with the companies they invest in, because their experience as a customer speaks volumes about the value of the company and its products and services.
Here are the kinds of things to look for as indicators of a companys worth:
1)How popular is their product or service? If everyone you know uses it, and is satisfied with such things as price, customer service, and reliability, the company is probably well situated among the competition.
2)Are the employees satisfied? One of the best ways to judge a company is by talking to employees. Many companies put on a good faade, but underneath the fancy marketing is plenty of discontent. But if employees like a company especially if they like it enough to buy stock in it thats a very good sign.
3)How well known are they? You may find a great startup company with all the trappings of success, but discover that it is lesser known. Many small or regional companies are popular in their own back yards, but the rest of the world may not yet know about them. Buying such unknowns can be a great way to invest in the next hot stock. If the fundamentals look good, sometimes being lesser known is a good thing for investors getting in on the ground floor.
4)If they went out of business, where would you go for similar products and services? If you cant think of a convenient alternative, the company is probably in a niche market that enjoys customer loyalty and repeat business.
Shop around, and notice what you see and how each business makes you feel. Then trust your intuition. Make a list of companies that get your attention, and then call their shareholder relations department and ask for more details. By starting your list with companies you already have a first hand experience of, you raise the chances considerably that you will make smart choices.